Question

A biofuel subsidiary of Petrofac, Inc. is planning to borrow $12 million to acquire a small technology-based company. The rate of interest on a 5-year loan is highly variable; it could be as low as 7% or as high as 15%, but it is expected to be 10% per year. The company will only move forward with the acquisition offer if the AW is below $6 million. The M&O cost is fixed at $3.1 million per year. The anticipated sales price of the company could be $2 million if the interest rate is 7%, or as much as $2.5 million if the rate is 15%, but will most likely be about $2.45 million at a rate of 10% per year. Is the decision to move forward with the acquisition sensitive to the loan's interest rate and salvage value estimates? The annual worth with a rate of 7% is $ . The annual worth with a rate of 10% is $N The annual worth with a rate of 15% is $ The decision is (Click to select) A.

Answer 1

a)

r = 7%;

Annual Worth = -12,000,000 x A/P (7%, 5) - 3,100,000 + 2,000,000 x P/F (7%, 5) x A/P (7%, 5)

= (- 12,000,000 x 0.2439) – 3,1000,000 + (2,000,000 x 0.7130 x 0.2439)

= - 2,926,800 - 3,100,000 + 347,801.4

= -5,678,998.6

b)

r = 10%,

Annual Worth = -12,000,000 x A/P (10%, 5) - 3,100,000 + 2,450000 x P/F (10%, 5) x A/P(10%, 5)

= (- 12,000,000 x 0.2638) - 3,1000,000 + (2,450,000 x 0.6209 x 0.2638)

= - 3,165,600 - 3,100,000 + 401,293.88

= -5,864,306.12

c)

r = 15%,

Annual Worth = -12,000,000 x A/P (15%, 5) - 3,100,000 + 2,500,000 x P/F (15%, 5) x A/P (15%, 5)

= (- 12,000,000 x 0.2983) - 3,1000,000 + 2,500,000 x 0.4972 x 0.2983

= - 357,960 - 3,100,000 + 370,786.9

= -3,087,173.1